Brexit: an historic rupture of postwar order

The UK voted to quit the European Union after more than four decades in a stunning rejection of the continent’s postwar political and economic order, sending shock waves around global markets.

The pound plunged to the lowest since 1985, Asian stocks tumbled and US treasuries surged in one of the most dramatic 24 hours in modern British history. Just after 6am London time, with most votes in, the BBC said there was no way back for the pro-EU side, with voters having backed “Leave” by 52% to 48%.

“This is the biggest shock to European politics since the fall of the Berlin Wall,” said Rob Ford, professor of politics at Manchester University. “How can the prime minister possibly go on after a rejection as emphatic as this?”

The vote sets the UK up for years of bitter divorce talks with the EU and deals a body blow to Prime Minister David Cameron, who said such a result would tip the country into recession.

JPMorgan Chase & Co and HSBC Holdings have said Brexit would lead them to move thousands of jobs out of London.

The outcome is a victory for Boris Johnson, the former mayor of London who broke with former schoolmate Cameron to help lead the “Out” campaign and sets him up for a potential tilt at the premiership.

The result widens fissures in the UK by raising the prospect of another push for Scottish independence. Beyond Britain’s shores, it will fan speculation that more countries could withdraw from the EU and gives a fillip to populist insurgents such as Donald Trump and Marine Le Pen. Above all, the outcome shows just how disillusioned Western voters have become with the political establishment for failing to deliver more inclusive economic growth in the era of globalisation.

“Hurrah for the British!” tweeted Geert Wilders, the anti-EU, populist leader of the Dutch Freedom Party that leads in opinion polls ahead of elections in the Netherlands next spring. “Now it is our turn.”

Firefighting

The market rout had echoes of the 2008-2009 financial crisis. The pound fell as much as 11% to $1,3305, on course for its worst day on record. Oil tumbled by 6,8%, gold jumped by 8,1% and futures on the FTSE 100 Index fell by 8,5%. HSBC, which earlier this year opted to keep its headquarters in London, plunged as much as 8,7% in Asian trading. The selloff was compounded by the fact that markets had rallied over the past week on optimism that the UK would vote to stay.

Boris Johnson got behind the “Leave” campaign

Finance officials may have to start firefighting in the next few hours. The Bank of England has already said it will monitor liquidity conditions in the referendum’s aftermath, and governor Mark Carney is likely to make a public statement. The Bank may end up having to cut interest rates or revive quantitative easing. Today’s decline in the pound already far exceeds its previous record decline in 1992, when it fell by 4,1% on Black Wednesday, the day the currency was forced out of Europe’s exchange-rate mechanism.

Elsewhere, the Federal Reserve may delay raising rates. Denmark, Switzerland and Japan could intervene in markets to avoid surges in their currencies.

Rag-tag Victory

The result marks a victory for a rag-tag band of politicians and executives who took on Britain’s establishment and won. Conservatives Johnson and Michael Gove broke with Cameron to form a loose alliance with the UK Independence Party, arguing that the island nation can go it alone in an era of globalisation. It was also a massive victory for UKIP leader Nigel Farage, who has campaigned for the UK to leave the EU for a quarter century.

“Let 23 June go down in our history as our Independence Day,” said Farage, a former commodities broker. “The eurosceptic genie is out of the bottle and it will now not be put back.”

Tapping into voters’ worries about immigration, the pro-Brexit leaders said that Britain can only exert full control over its borders and budget by leaving the EU. That promise overcame repeated warnings from Cameron and a cast of supporters that included the Pope, the Archbishop of Canterbury and the US president.

The murder of pro-EU lawmaker Jo Cox last week slowed without stopping the momentum behind the Brexit message.

The next steps are unclear as politicians in Britain and the rest of Europe feel their way through the unprecedented situation.

Exit trigger

At some point — when exactly is debated — the UK will trigger exit talks by invoking Article 50 of the Lisbon Treaty. That will set a two-year clock ticking on negotiations. The relatively short time frame means even supporters of Brexit have argued to hold off until the country has decided what sort of relationship it wants with the rest of the EU.

Prime Minister David Cameron

For the EU and its most powerful leader, German Chancellor Angela Merkel, the result presents yet another challenge after years of crisis. EU unity has already been sorely tested by Greece’s seemingly endless debt woes, sanctions on Russia and the Syrian refugee crisis.

Now, Merkel and French President Francois Hollande need to rally confidence in a project increasingly questioned by populists like Le Pen in France and Italy’s Five Star movement. To Merkel and Hollande, the EU is a symbol of Europe’s resurgence from World War 2. But to others it’s resonant of weak economic growth, high unemployment and overbearing regulation.

Tough talks

Among the first decisions for Merkel and Hollande will be how tough they want to be on the UK in the upcoming negotiations, especially as some countries will surely want to make an example of Britain to stop others from leaving. The first indications of their joint position may come on Monday, when Hollande travels to Berlin ahead of a 28-29 June meeting of EU leaders. Finance ministers could confer as soon as this weekend.

The EU referendum decision “causes damage to both sides”, Manfred Weber, a member of Merkel’s party who heads the conservative EPP group in the European parliament, said on Twitter. “Exit negotiations should be concluded within two years at max. There cannot be any special treatment. Leave means leave.”

Another key question will be who leads Britain’s negotiations. Cameron, who now presides over a deeply divided country and party, had already pledged to leave before the next election. But after one of the biggest foreign policy failures by a British prime minister in the modern era, one which put him on the wrong side of the debate from his Conservatives and the majority view in the UK, it is hard to see him lasting even a year.

Who’s in

While Cameron will probably give clarity on his future within hours, privately even his opponents have said they want him to stay on for a few months — an immediate resignation would only spell even more instability. Chancellor of the Exchequer George Osborne, who, like Cameron, had hoped that a referendum would heal Conservative splits over Europe, may lose his job sooner after being accused of scaremongering over the economy.

Johnson is the bookmakers’ favorite to succeed Cameron. Other potential heirs include justice secretary Gove and home secretary Theresa May. Whoever takes over is likely to seek his or her own mandate with another general election, meaning British voters may have to go to the polls for a third time in two years.

There’s also a question mark over the future of the Brexit lobby and its key figures such as Farage, who were excluded from the official “Leave” campaign. Having led the country to the EU door, it’s unclear whether they will be content to leave exit negotiations to the Conservative government.

The City

One industry particularly under threat is financial services, which employs more than 2m people nationwide and paid £66bn ($88bn) in tax last year. The City of London’s status as a financial capital may now be eroded, especially if the UK loses “passporting” rights which allow banks to reside in the UK and sell their products and services throughout the EU.

JPMorgan Chase & Co CEO Jamie Dimon, who has 16 000 employees in London and other British cities, said this month a vote to leave could mean a quarter of those jobs might be cut. Morgan Stanley and HSBC have made similar noises.

The vote could set in motion the breakup of the UK. First Minister Nicola Sturgeon may now use the decision to revive talk of independence for Scotland, where 62% voted to “Remain.” The vote also complicates things for the Irish, who will now face barriers to the free movement of goods and workers between the Republic of Ireland and Northern Ireland.

“I don’t know the forces they have unleashed in winning this,” Steve Fielding, a professor of political history at the University of Nottingham, said by phone. “I don’t know this is in the capacity of any one person to control.”

For one American visiting Britain this week, the result will be of particular interest. An anti-establishment campaign, talking tough on immigration, accused of stretching the truth? Its victory will surely bring a smile to the lips of Donald Trump. — (c) 2016 Bloomberg LP